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# CHAP 10 - CHAP 10 Output and costs Olivier Giovannoni 304K...

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CHAP 10: CHAP 10: Output and costs Output and costs Olivier Giovannoni 304K: Introduction to Microeconomics Oct. 8, 2007

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Introduction Introduction The study of the behavior of the firm is a central aspect of microeconomics . Why? Some decisions are critical to the survival of the firm, Some decisions are irreversible (or very costly to reverse) The economic goal of companies is to maximize: profit = total product – total costs equivalently, to minimize: total cost per unit. However this objective can be arrived at in different ways depending on the time frame: The short run The long run CHAP 10 – Output and costs 2
Definitions Definitions For costs, it is important to distinguish between Long run costs: in the long run, all the factors of production are flexible (labor, capital, land). Long run decisions are not easily reversed or are costly. Short run costs: in the short run one (or more) resources are fixed. Typically capital and land are given in the short run, so that costs can only be changed through an adjustment of the quantity of labor. Short run decisions are easily reversed. For costs and product(ion) we have to distinguish between: Total product and total cost Marginal product and marginal cost Average product and average cost CHAP 10 – Output and costs 3

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1- Product side 1- Product side For products: Total product (TP) is the total output produced in a given period. The marginal product (MP) of labor is the change in total product that results from a one-unit increase in the quantity of labor employed, ceteris paribus . The average product (AP) of labor is equal to total product divided by the quantity of labor employed. CHAP 10 – Output and costs 4 Point Labor TP MP AP A 0 0 4 B 1 4 4 6 C 2 10 5 3 D 3 13 4.33 2 E 4 15 3.75
1- Product side (cont.) 1- Product side (cont.) The total product increases with more labor used: CHAP 10 – Output and costs 5 This is related to technology / productivity: a technological advance will shift your total product upwards. Hiring a more productive worker will make your curve go up faster. The contribution of the last worker employed is large for the first hires, but will eventually decrease.

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1- Product side (cont.) 1- Product side (cont.) The return of the last worker employed (=marginal product ) may be increasing at first, but eventually will start diminishing. Almost all production processes are like that. This is because (1) as more workers are employed, only the less productive tasks remain to fill, or (2) the most productive workers are hired first. This is called the law of diminishing returns : Given the fixed factors of production, the marginal product of the variable factor eventually diminishes, ceteris paribus.
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CHAP 10 - CHAP 10 Output and costs Olivier Giovannoni 304K...

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